PRICE DETERMINATION

What is the equilibrium price?

The equilibrium price is the price at which the quantity demanded by consumers equals the quantity supplied by producers.

What is the equilibrium quantity?

The equilibrium quantity is the amount of a good or service bought and sold at the equilibrium price.

How is equilibrium price and quantity determined?

Equilibrium is determined by the interaction of supply and demand in a market. When supply equals demand, the market is in equilibrium.

What happens if the price is above the equilibrium price?

There is excess supply (a surplus) because producers supply more than consumers demand.

What happens if the price is below the equilibrium price?

There is excess demand (a shortage) because consumers demand more than producers supply.

How does a supply and demand diagram show excess supply?

Excess supply is shown on a diagram as the distance between the quantity supplied and the quantity demanded above the equilibrium price.

How does a supply and demand diagram show excess demand?

Excess demand is shown on a diagram as the distance between the quantity demanded and the quantity supplied below the equilibrium price.

What are market forces?

Market forces are the natural tendencies of supply and demand to move a market toward equilibrium without external intervention.

How do market forces eliminate excess supply?

When there is excess supply, the price falls, increasing demand and reducing supply until equilibrium is restored.

How do market forces eliminate excess demand?

When there is excess demand, the price rises, reducing demand and increasing supply until equilibrium is restored.

How can shifts in the demand curve affect equilibrium price and quantity?

An increase in demand shifts the curve right, raising equilibrium price and quantity. A decrease in demand shifts the curve left, lowering equilibrium price and quantity.

How can shifts in the supply curve affect equilibrium price and quantity?

An increase in supply shifts the curve right, lowering equilibrium price and raising equilibrium quantity. A decrease in supply shifts the curve left, raising equilibrium price and lowering equilibrium quantity.

How do supply and demand diagrams help explain real-world situations?

They visually show how changes in factors such as consumer income, production costs, or government policies shift supply or demand, affecting equilibrium price and quantity.

Give a real-world example of demand increasing.

For example, during a heatwave, the demand for ice cream increases, shifting the demand curve right, increasing equilibrium price and quantity.

Give a real-world example of supply decreasing.

For example, a poor harvest reduces the supply of wheat, shifting the supply curve left, increasing equilibrium price and reducing equilibrium quantity.

Why is understanding equilibrium important for economists?

It helps predict how prices and quantities will adjust in response to changes in market conditions and informs policy decisions.

How does government intervention, like a price ceiling, affect equilibrium?

A price ceiling set below equilibrium creates excess demand (shortage), while a price floor set above equilibrium creates excess supply (surplus).

The role of signalling in market forces

Prices signal to consumers and producers how to adjust behaviour: high prices reduce demand and encourage supply; low prices increase demand and discourage supply.

What happens to equilibrium if both supply and demand increase simultaneously?

Equilibrium quantity rises, but the change in equilibrium price depends on the relative size of the shifts.

What happens to equilibrium if demand increases and supply decreases simultaneously?

Equilibrium price rises, but the change in equilibrium quantity depends on the relative size of the shifts.